Raghuram Rajan under fire: Nothing new for an RBI Governor

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Swamy wants the Prime Minister to remove the Governor whose three-year-term comes to an end in September this year for acting as a “disruptor of the Indian economy than the person who wants the economy to grow”. It would appear that Swamy as well as many in the Indian industry reckon that the RBI under Rajan’s watch hasn’t been aggressive enough in lowering interest rates enough to boost sentiment and prompt companies to invest more and build factories and create jobs. The RBI has so far cut interest rates by 150 basis points and Rajan as well as the RBI has often said in the past too that interest rates alone don’t quite determine or influence investment decisions citing the excess leverage of many Indian firms and their debt laden balance sheets and the state of Indian banks besides policy hurdles. In the past, the RBI, too, had pointed to empirical evidence on this but for industry, individuals and for political parties — near or medium term gains or outcomes count than for a central bank which has to look at a far longer horizon to base its judgement.

For parties in power too – especially the NDA which was voted to office after two years of sub – five per cent growth and which had promised to put the economy back on course, it isn’t easy to explain to their constituents and to lakhs of young people seeking jobs that a stable economy marked by fiscal parameters under control as also inflation would pave the way for sustained growth. Rajan believes that the short term pain may well be worth it as like in the Rangarajan era in the mid to late 1990s when interest rates were in high double digits as inflation rose. That’s a bet this government may have also taken, like going along with him, in going for a painful clean up of state owned banks which is scheduled to be completed by March 2017.

Swamy has also been unhappy that the RBI has adopted the Consumer Price Index or CPI as the operating tool for measuring inflation rather than the Wholesale Price Index or WPI. But it was his government which signed a historic monetary policy framework agreement on this in February 2015 while setting out the target for inflation!

The BJP MP, who has been aggressive in targeting others in the past including Sonia Gandhi, is also irked that Rajan who, according to him, is on a green card provided by the US Government, is therefore not mentally Indian.

Over the last couple of years, it has been interesting to note that it was the central bank chief who spoke on issues such as tolerance rather than ‘locals’ and offering a reality check on the state of the Indian economy when he made the remark – “a one eyed king in the land of the blind” only to be pilloried. Surprisingly, for someone whose experience in the Indian policy establishment was restricted to just a year or more as Chief Economic Advisor, Rajan hasn’t quite tripped. On the Indian part, Swamy is skating on thin ice. Surely, Swamy who has taught at Harvard University, would know that the UK doesn’t seem to regret its choice of a Canadian – Mark Carney to head the Bank of England. Similarly, Israel was happy to have Stanley Fischer, a former World Bank chief economist and a professor like Rajan, to head its central bank for a long time. Fischer, who took Israel citizenship, didn’t renounce his US citizenship then.

It is not that everything that the Indian central chief has done is blemishless. The judgement of many of his moves, we will have to make a few years down the line. But a key test would be to evaluate the growth and stature of the institution he heads. There are those critics who reckon that he sometimes overshadows the institution given his image but there are many who feel that the institution’s stature has risen considerably. It may also have to do with the fact that central bank governors world over and in India too — given its rise in the global economic pecking order — are seen as wielding enormous influence. More importantly, at a time of enormous challenges for institution building in India, he has shown that someone — an economist and an academician — a rank outsider can make the cut well and create a lasting impact.

India’s history of opening up is marked also by the fact that complementary forces were at work then. Both outsiders and the insiders – the career civil servants worked together as a team showing mutual respect, and bringing in talented young professionals to work with the government. Over the last decade or so, it has become even more tough to get a toehold in. It is not about Rajan or personalities, but the larger institutional growth and picture which is at stake as the public discourse gets coarse.